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Sangara Narayanan
Sangara Narayanan
Articles (562) 

CVS Not in the Pink After Earnings Call

40 million prescription losses through 2017 has taken the wind out of CVS stock

November 09, 2016 | About:

CVS Health (NYSE:CVS) stock slid by more than 10% after the company lowered its guidance for the current fiscal. CVS said the company expects full-year adjusted earnings to come in the range of $5.77 to $5.83 instead of the previously announced $5.81 to $5.89 due to a slowdown in prescription sales and soft seasonal business.

CVS stock has been under intense pressure since May of this year and has lost more than 23% of its value in the last 12 months.

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The company posted net revenue growth of 15.5% for the quarter, which was not enough to shore up the market’s confidence as the company missed analyst estimates by a wide margin. Wall Street was expecting the company to post $45.5 billion in net revenues while the actual number came in at $44.6 billion.

CVS Health’s EPS of $1.64 for the quarter was much better than the $1.57 the market expected, but the damage was done when the revenue miss was coupled with a downward revision of earnings outlook. Competition in the market seems to be the reason behind the lowering of expectations, and that is not something investors really like to see.

"The company said it expects to lose more than 40 million retail prescriptions in 2017. About 40% of those prescription losses are due to competitor Walgreens' (NASDAQ:WBA) new mail-order pharmacy tie-up with Prime Therapeutics and U.S. Department of Defense health care program TRICARE exiting the CVS network, CVS CEO Larry Merlo told investors. The rest is just the normal churn that takes place." - USA Today

The loss of prescriptions is a serious setback for CVS Health as they will lose some of their most profitable ones. As such, the outlook for the entire year ahead is bleak, hence the belligerent market sentiment towards the company. Merlo said that the deals were “unexpected,” but fact remains that CVS has been left out in the cold by the Department of Defense on the Tricare deal for active and retired military personnel, and the company needs something to offset the losses.

Can CVS Health bounce back from this unfortunate series of events? Possibly, but they will need to look beyond organic growth to make that happen. Merlo insists that CVS will post a 10% growth in adjusted EPS over the long term, but we will have to wait and see how he plans to achieve that target.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

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About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

Rating: 3.0/5 (1 vote)

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Comments

Praveen Chawla
Praveen Chawla premium member - 2 years ago

Fair value is probably around $75. Good opportunity to own a member of a duopoly.

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